DeFi protocol launches its own stablecoin, ushering in a new "Wildcat Era"

In the current bear market environment, the revenue of traditional DeFi applications continues to shrink. In search of new growth points, some leading protocols are exploring the issuance of their own stablecoins to create new sources of income and expand their business scope. This article will analyze this new trend and its potential impact in depth.

The Emergence of Stablecoins in Protocols

As on-chain activities decrease, the profits of fee-based DeFi business models continue to shrink. To address this, some blue-chip protocols are beginning to seek diversified development to enhance the sustainability of the protocols. We have already seen some early attempts, such as the launch of new products like liquid staking and lending.

And now, we are seeing a new form of diversification - protocol-specific stablecoins. These stablecoins are usually issued in the form of credit, allowing users to mint stablecoins by collateralizing assets. Protocols can generate income through methods such as lending interest, minting/redeeming fees, arbitrage, and liquidation.

The total market value of stablecoins in the current crypto ecosystem has reached $145 billion, and the market space in the future is enormous. As regulatory agencies increase their focus on centralized fiat stablecoins, decentralized stablecoins may usher in development opportunities.

GHO and crvUSD

Currently, the two most prominent protocols launching their own stablecoins are Aave and Curve, which have issued GHO and crvUSD respectively.

GHO is a decentralized stablecoin issued by Aave, supported by over-collateralized deposits on Aave V3. Unlike other assets from Aave, the borrowing rate for GHO is manually set by governance, allowing the DAO to flexibly adjust the minting costs. In the future, GHO will also support minting from outside Aave V3 through whitelisted "facilitators."

crvUSD is a decentralized stablecoin issued by Curve, utilizing a new lending liquidation AMM algorithm (LLAMA). This algorithm allows for gradual liquidation when the value of user collateral decreases, avoiding a one-time complete liquidation, thereby improving the borrower experience. crvUSD is likely to be minted using LP tokens from the Curve pool, which will enhance capital efficiency for liquidity provision on the platform.

Potential Impact on the Market

1. Revenue from the issuance protocol has increased.

Self-issued stablecoins provide an additional source of income for protocols, helping to diversify business models and enhance risk resistance. Compared to traditional trading fees and interest margin income, the generation efficiency of stablecoin interest income is higher.

2. Token holders benefit

Token holders of the issuance protocol may benefit from stablecoin income. For example, Curve may share crvUSD income with veCRV stakers. This will make the token more attractive and is expected to enhance token performance.

3. Governance bribery and liquidity fragmentation

Stablecoins require strong liquidity support. This may stimulate the governance bribery market, where issuers compete for liquidity on DEXs through bribery. This will increase the yields for token stakers like CRV and BAL, but it may also lead to further fragmentation of liquidity.

4. Credit Boom

To attract users, the new stablecoin may offer loans at lower interest rates. This low-interest driven credit boom could stimulate the entire Decentralized Finance and cryptocurrency market, providing cheap funds for leveraged trading and arbitrage.

Conclusion

As more and more DeFi protocols issue their own stablecoins, we seem to be entering a new "wildcat era". Although these new stablecoins may struggle to surpass existing giants like DAI and FRAX, they can explore niche markets by leveraging deep integration with the issuing protocol.

This trend is expected to strengthen the business model of issuance protocols and create value for token holders. However, as various parties may engage in interest rate competition, the actual effect remains to be seen. Ultimately, this low-cost capital may stimulate on-chain economic activity and inject new vitality into Decentralized Finance.